Enron World Com Global Crossings Etc Prepared by

Enron, World. Com, Global Crossings, Etc. Prepared by Rick Antle 1

Implement this Basic Picture Wealth (Balance Sheet) Time Income (Income Statement) 2

How We Do It • Economic concepts – Ideas that form the foundation of financial reporting. • Accounting conventions – To implement those ideas by setting the criteria for: Recognition, classification and valuation. • Institutional context – Incentives, enforcement environment, etc. that affect what people will do. 3

Economic Concepts Deceptively Simple • Entity – Whose accounts are they? • Wealth – Value of assets minus liabilities • Income – Change in wealth, excluding contributions of and distributions to owners 4

Accounting Conventions • Recognition – How and what do we include in the accounting? • Classification – Where do we put it? • Valuation – What numbers do we use? 5

World. Com • A large telecommunications company • Paid fees ($3. 8 billion) to access other carriers’ networks • Did they… – Incur an expense that should reduce income, or – Buy an asset? 6

It Depends • Were future benefits acquired? – If not, there is no asset • Are those future benefits likely to be realized? – If uncertainty is large enough, no asset will be recognized 7

Use World. Com to Highlight Timing Effects Balance Sheet Made an asset here Balance Sheet Time Income Statement Kept an expense off here Income Statement Would have been amortized here (and later) 8

Enron • There is an easily overlooked part of the basic picture: The entity • Accounting takes a point of view: The owners of the entity • Example: – You deposit money in a bank – For you, it is an asset – For the bank, it is a liability 9

Enron Basics: Debt Enron Corp JEDI 1 Enron Payments Different companies? If so, debt is only JEDI’s. Two parts of same company? If so, debt is ENRON’s. Loan Creditors 10

Enron Basics: Income Enron Corp Transfers Asset JEDI 1 Cash Enron Different companies? If so, SALE. Two parts of same company? If so, NOTHING. 11

More Complete Enron Picture Outside (? ) investors Equity Enron Corp Assets transferred Payments JEDI Cash Enron Payments Still a basic question: ENTITY? Loan guarantee Loan Creditors 12